MGM cleans up in carbon trading

Sunday, January 13, 2008; Posted: 08:15 PM

Jan 13, 2008 (The Miami Herald - McClatchy-Tribune Information Services via COMTEX) --
BRD | news | PowerRating | PR Charts -- While American politicians continue to dither about
what should be done to stop global warming, a Miami firm is already developing an international
market to reduce greenhouse gases through carbon credits.

MGM International, with headquarters on Brickell Key and offices around the world, has had
such a promising start that Wall Street giant Morgan Stanley has purchased 38 percent of the
company.

Morgan Stanley views this business as "a very big growth area," says Nancy King, an MS
managing director, head of U.S. emissions trading. The global market in carbon trading was $30
billion last year -- and is growing rapidly, even without U.S. participation.

MGM is a prime example of how the business of green is sprouting everywhere -- developers
creating energy-efficient houses, manufacturers making energy-efficient appliances.

"There is a huge business opportunity here," says Marco G. Monroy, 38, the chief executive and
founder of MGM International.

Monroy, an environmental lawyer, started MGM International in 2001 in Washington when he

saw the European Union and the international Kyoto Protocol planning cap-and-trade programs.

Under cap-and-trade, the government decides how much carbon -- the most common
greenhouse gas -- should be in the atmosphere, with gradual reductions over time. Each year, it
gives or sells allowances to emit carbon. If a company does a good job of cutting its emissions,
it could sell left-over credits to others that are having trouble reducing carbon. If it has trouble
reducing emissions, it will have to buy credits.

The system allows dirty coal-burning power plants in Germany to offset their carbon production
by, say, cleaning up gas-spewing dumps in India.

Monroy focused his efforts first on Latin America, where the Colombia native knew the language
and had the contacts. By the end of 2002, he moved the company to Miami to save on travel
time.

Morgan Stanley bought into the company for an undisclosed amount in December 2006
because it views MGM as "a high-integrity shop," says King, that's a "good fit" for the investment
firm that is developing climate-change businesses on several fronts. "Clearly they have the
technical experts around the world that we can't replicate."

MGM now has 100 employees, most of them engineers, working out of 10 offices, including
Buenos Aires, New Delhi and Beijing. Locations in Italy, Norway and the United Arab Emirates
are expected to be added this month, with a Southeastern Asia hub in Singapore established in
February, says Monroy.

Here's an example of how the company works: Coal-burning power plants in Japan are finding it
expensive to cut their emissions. MGM found a dump in Brazil that could greatly reduce its
methane-gas emissions if it had $4 million or $5 million to do it.

That's too pricey for any Brazilian government or company. So MGM arranged for the Japanese
power industry to front the money for the clean up.
Monroy acknowledges the possibilities for fraud in the system, with officials taking bribes to sign
phony documents. "But that's easy to deal with." MGM engineers first document how much
methane is produced before the clean up and then much goes into the atmosphere afterward.

"You can hire an auditor," says Monroy, just like a company would to verify its financial records.
Some large European firms, SGS in Switzerland and TUV in Germany, are already moving into
this space. "Their reputations are on the line," ensuring they'd do their best to catch fraud.

John Coequyt at Greenpeace says this Kyoto system "has minor flaws but works quite well in
checking emissions projects."

All the major investment firms in New York and Europe, including Morgan Stanley, have set up
trading desks for handling carbon credits, but carbon is different than other commodities. "It's
not like gold or silver, which have some value onto themselves," says Alex Rau of Climate
Wedge, a British investment group. "Nobody wants carbon credits. The government defines
what they are."

Government-created commodities can get squirrelly, as happened during the first phase of
carbon-credit trading in Europe, where regulators issued too many carbon credits, causing
prices that once reached $40 a ton to collapse to 3 cents.

That was the first phase, which ended Dec. 31. "That failure shows us how to do it well," Monroy
says. Europe is now in Phase 2, with much better allocation of credits, he says.

The price per ton of carbon for December 2008 has stabilized, recently trading around $34.

Under Kyoto, the theory is industrialized nations have been producing greenhouse gases for the
past 100 years and they need to be the first to act. It would be too expensive and difficult to
require the same standards of developing countries, at least at first.

However, since there is a single worldwide atmosphere, "it doesn't matter where you solve the
problem," says Monroy. That's why MGM works primarily in developing countries, where it's
often cheaper to reduce emissions.

There's also the so-called second world -- Russia and Eastern Europe. And here the system of
carbon credits gets a bit weird. Because Russia had a big-economic downtown in the 1990s
and closed down many gas-belching factories, it has a huge number of carbon credits to sell.

"If Russia sells all its credits, it will kill all Kyoto projects," says Maria Pia Iannarielllo, MGM's
chief operating officer. She believes the Russians are too smart to let that happen. "They will
sell only a little bit," making a few billion dollars a year, because if they dumped all their credits
at once, they'd lose huge sums with the market collapse.

Traders talk in terms of carbon, the most common emission problem, but MGM has little to do
with carbon.

The reason: Methane, found in landfills, has 21 times more effect than carbon on global
warming, according to scientists. Nitrous oxide, found in fertilizer and plastic manufacturing
plants, has 310 times the effect of carbon. A rare gas called SF6, produced primarily by
magnesium plants, is said to have 23,000 times the effect of carbon.

For trading purposes, all of these get translated into carbon equivalents, but MGM finds that it's
much cheaper to go after the "low-hanging fruit" provided by the rarer substances, says Monroy.

All of this has led to tremendous opportunity -- and competition. "When I started, there were two
companies doing this," says Monroy. "Now there are maybe 50 or 60." But only a few, like
MGM, are global players. "Half of our business is in China."
Eventually, however, he thinks MGM could find work closer to home. "We have no doubt that
something will start in the United States."